Post by
hawk35 on Dec 22, 2023 4:28pm
RBC Comments on Acquisition
Wow. RBC is extremely positive about this acquisition. They basically called it a "must do" acquisition.
Here is the RBC update.
December 19, 2023
Pembina Pipeline Corporation
Strategic, accretive and all that jazz
Our view: We positively view the transaction that is both strategic and immediately accretive to AFFO/share with near and long-term upside from potential cost and commercial synergies. More broadly, we believe the acquisition should give the market confidence in the M&A strategy with respect to Pembina's desire to deliver immediate AFFO/share accretion while keeping debt/EBITDA under 4x.
Key points:
Strategic consolidation of ownership in existing assets. The acquisition provides an opportunity for Pembina to take full-control of the Alliance Pipeline, which runs from Western Canada to the Chicago-area, by acquiring the 50% stake that it did not already own, while doubling its ownership interest in Aux Sable's U.S. assets to 85.4% (up from 42.7%).
Immediately accretive to AFFO/share (without synergies). Based on our analysis (please see Exhibit 1 on page 2), we estimate that the transaction excluding any synergies will be roughly 3% accretive to AFFO/share in the first full year of ownership.
Potential synergies represent additional upside to AFFO/share accretion. Pembina believes that it can extract $40-65 million of annual synergies that it expects to realize by 2025 through a combination of cost savings, structural efficiencies of a single ownership entity, and increased marketing opportunities. We estimate that AFFO/share accretion could be as high as 5% if Pembina can achieve the high-end of its synergy range.
No material change in debt/EBITDA. We estimate that the transaction will result in a minimal change in Pembina's debt/EBITDA (i.e., only 0.1-0.2x higher). Pembina's pro forma leverage metric should be comfortably below 4.0x given the company's pre-transaction guidance that it expects to exit 2024 with debt/EBITDA in the 3.3-3.6x range.
A read through for any future acquisitions. We view the acquisition of the remaining stake in Alliance that Pembina did not already own, as well as the increased interest in Aux Sable, as being as close to a "must do" acquisition as it gets. With Pembina's acquisition discipline appearing set to extract meaningful accretion with a minimal change in debt/EBITDA for this "must do" acquisition, we believe investors should take comfort that Pembina will be similarly disciplined if it pursues future acquisitions.
Increasing our estimates to reflect the transaction. Our new 2024 and 2025 EBITDA estimates are $4.095 billion and $4.404 billion, respectively (up from $3.941 billion and $4.032 billion, respectively) which reflect Pembina's incremental ownership in the assets. Our new 2024 and 2025 AFFO/share estimates have increased to $5.12 and $5.41, respectively (up from $5.08 and $5.22, respectively) and reflect higher EBITDA, partially offset by higher interest expense and a higher share count.
We expect 3% AFFO/share accretion with no material change in debt/EBITDA
As shown in Exhibit 1, we expect the transaction to be immediately accretive. Specifically, we expect 3% accretion to AFFO/share without synergies, and up to 5% accretion inclusive of Pembina’s guidance for $40-65 million of annual synergies that it expects to realize by 2025. With respect to debt/EBITDA, we estimate that the transaction will very minimally add to leverage (i.e., an increase of about 0.1-0.2x).
Target/Upside/Downside Scenarios
Target Valuation
Our $58.00/share price target is based on an EV/EBITDA multiple of 11.5x 2025E. For much of the last 15 years, Pembina’s shares have traded within a range of roughly 10– 13x EBITDA (although its peak valuation was in the range of 20x). With improving market fundamentals, new growth projects, and a stronger focus on capital allocation versus the past, we believe there is support for the stock trading in the upper half of its historical valuation range. We believe that the relative risk-adjusted expected total return to our price target supports our Outperform rating on the shares.
Upside scenario
Our $65.00 per share upside scenario is based on a 1.0x premium to our base valuation (resulting in EV/EBITDA being at the high-end of the 15-year range) and new projects that could include the Prince Rupert Terminal expansion or Cedar LNG.
Downside scenario
Our downside scenario of $38.00 is based on applying the low[1]end of the valuation range that the stock has traded at over the past 15-years (i.e., 10x EBITDA) to our forward EBITDA adjusted for a Marketing contribution that is at the low-end of the five-year range.
Investment summary
We expect Pembina’s shares to outperform its peers for the following key reasons:
• Well-positioned to benefit from higher WCSB production. Whether it be uncontracted capacity or within its contract structures that blend minimum take-or-pay levels with fee[1]for-service upside as volumes grow, we expect Pembina to benefit from growing gas and liquids volumes in the Western Canada Sedimentary Basin (WCSB). Further, growing volumes could result in contracted infrastructure opportunities including NGL fractionation expansion and/or pipeline expansion projects.
• Free cash flow generation after all capex and dividend payments provides a range of capital allocation opportunities. In 2022, the company prioritized share buybacks with the strategy going forward focused on creating balance sheet optionality by reducing leverage. Lower debt levels should position the company to pursue a wide-range of growth initiatives on an equity self-funded basis.
• Solid base of business with a commodity kicker. Pembina's guardrails target over 80% of EBITDA coming from fee[1]based revenues, primarily underpinned by take-or-pay or cost-of-service contracts, which underpin the dividend. As upside optionality, Pembina's Marketing division can benefit from leveraging its asset base to take advantage of various commodity spreads.
• Potential catalysts. Improved investor sentiment toward energy and midstream stocks; additional volumes for the conventional pipeline system; government programs that strengthen oil and gas producing customers; increased Montney producer activity on the back of the sanctioning of the third-party LNG Canada project.
Risks to rating and price target
Risks to our price target and rating include: (1) a weak market for energy including lower-than-expected throughput on the pipeline systems; (2) regulatory intervention; (3) the ability to complete new projects on time and on budget; (4) operational issues; (5) reduced margins in the midstream and marketing segment; and (6) acquisitions, investments and/or projects that fail to gain the confidence of investors.